Google settles legal dispute with Yahoo

Search engine leader gives 2.7 million shares to rival

On the eve of its initial public offering, Web search provider Google Inc. has settled a long-running legal dispute by turning over 2.7 million more shares of its stock to a top competitor, Yahoo Inc.

The shares would be worth about $328 million based on the midpoint of Google's targeted IPO price range of $108 to $130 a share. In a filing with the Securities and Exchange Commission yesterday, Google boosted the number of shares it plans to sell to 25.7 million to cover the new shares granted to Yahoo.

Google's stock sale, which will be conducted through an Internet auction, is expected to begin this month. The company hopes to raise more than $3 billion.

"This lifts a shadow that had been hanging over Google and allows both sides to put this behind them," said Kevin Lee, chief executive of Did-it.com, a search engine marketing firm in New York.

Yahoo, as an early investor in Google, previously owned about 5.5 million shares. Google granted Yahoo warrants allowing it to buy an additional 1.2 million shares as part of a service agreement, but Yahoo had contested the award, claiming it was owed 3.7 million shares.

Moreover, a company acquired by Yahoo filed a lawsuit alleging that Google had violated a patent filed in 2001 for the sponsored-search and paid-search technology that is a key source of Google's revenues.

In exchange for the 2.7 million shares, Yahoo has dropped both cases and permitted Google to license the "pay-for-performance" search technology developed by Goto.com, which changed its name to Overture before being acquired by Yahoo in October.

The settlement brings to 8.2 million the number of Google shares held by Yahoo, making the Sunnyvale, Calif., rival one of Google's largest outside shareholders.

"We are pleased to have resolved these issues, and with the terms of the agreement," said Steve Langdon, a Google spokesman.

Yahoo spokeswoman Nicki Dugan said the settlement doesn't break out how many of the 2.7 million shares stemmed from the patent case and how many from the warrants dispute. "We're very pleased with the terms of the settlement agreement, and happy to have the dispute behind us," Dugan said.

Google, in its IPO registration statement filed with the SEC in April, identified Yahoo and Microsoft Corp., which is investing heavily in new search offerings, as its leading rivals. Noting potential exposure to intellectual property claims in a section of the statement titled "risk factors," Google cited the Overture patent suit but offered no estimate of its liability.

Still, industry leaders viewed the settlement as a positive sign for an IPO that has recently run into a number of speed bumps.

"They've removed a liability overhang," said Kent Womack, professor of finance at Dartmouth College's Amos Tuck School of Business Administration.

Though the company has never specified a date for its IPO, logistical problems arising from its complicated auction reportedly caused Google and its underwriters to delay the process for up to a week. The apparent delay figures to push the IPO into the peak vacation season of mid-to late August, when shares have been thinly traded historically.

Google also disclosed last week that it may have issued unregistered stock options, potentially worth $3.1 billion after the IPO. Google offered to repurchase the options for a fraction of that amount.

California and Connecticut have launched inquiries into whether the company violated state securities laws in issuing the options.